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How large are economic forecast errors?

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  • Stephen K. McNees

Abstract

Opinion about the reliability of economic forecasts ranges widely. Some argue that they are literally worthless, at the same time that most forecasters can point to a sequence of near perfect predictions. How much confidence should one place in economic forecasts? The errors vary with many factors. ; A crucial determinant of the size of forecast errors is the forecast period; some periods are very difficult to predict while others are relatively easy. By far the largest errors were the sustained underestimations of the acceleration of inflation in 1973-75 and again in 1978-80. In addition, variations in the difficulty of predicting different variables can be illustrated by examining the forecasts. The results show drastic differences among variables in the forecasters’ ability to outperform a naive standard of comparison. Finally, much of the interest in forecast accuracy stems from the wish to know "Who is the best forecaster?" Even a cursory examination of the information in this article shows that no single forecaster dominates all outliers for all, or even most, of the variables.

Suggested Citation

  • Stephen K. McNees, 1992. "How large are economic forecast errors?," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 25-42.
  • Handle: RePEc:fip:fedbne:y:1992:i:jul:p:25-42
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    File URL: http://www.bostonfed.org/economic/neer/neer1992/neer492c.pdf
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    References listed on IDEAS

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    1. Stephen A. Rhoades, 1986. "The operating performance of acquired firms in banking before and after acquisition," Staff Studies 149, Board of Governors of the Federal Reserve System (U.S.).
    2. Lamoreaux, Naomi R., 1986. "Banks, Kinship, and Economic Development: The New England Case," The Journal of Economic History, Cambridge University Press, vol. 46(03), pages 647-667, September.
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    Keywords

    Forecasting;

    Statistics

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